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Comparative Advantage, Opportunity Cost, and Outsourcing

  1. profile image0
    JaxsonRaineposted 5 years ago

    Outsourcing is bad, right?

    Not necessarily.

    First, you need to understand opportunity cost. Opportunity cost is the difference between what you get from spending resources to do X, and from spending resources to do Y. For example, consider a person who has a job that pays $30,000/year. This person decides to quit the job and spend $80,000 to go to college for 4 years.

    The opportunity cost to go to college is $80,000, + 4 years of lost wages(120,000). Total O.C. is $200,000. The student will hope to offset that cost with higher wages after graduating.

    In the case of outsourcing, the potential opportunity cost of keeping the work in the US can be worth to total value of the company and all employee compensation, if the higher costs cause the company to go bankrupt.

    We saw this with the auto industry. Factories were closed, people were fired, and wages were cut. However, the opportunity cost of trying to keep paying for all that would have been hundreds of thousands of jobs lost.

    Along the same lines is the concept of comparative advantage.

    John can produce 10 units of food per day, or 4 units of clothing.
    Jack can produce 6 units of food per day, or 8 units of clothing.

    If each worker spends half of their day producing one product, you get the following:
    John - 5 units food, 2 units clothing.
    Jack - 3 units food, 4 units clothing

    For a total production of 8 units of food and 6 units of clothing.

    But, if you look at comparative advantage, which takes into account the opportunity cost, you find that both John and Jack can achieve a better outcome.
    John - 10 units food
    Jack - 8 units clothing.

    By comparing their strengths(advantages), John and Jack can share an extra 2 units of food and 2 units of clothing every day.

    This happens all the time in the US. Companies find that they can outsource work, and use their capital to produce something else. Then they can trade for what they would have produced, and end up with more than if they had just produced it themselves.

    http://www.econlib.org/library/Topics/D … ntage.html

    1. rhamson profile image77
      rhamsonposted 5 years agoin reply to this

      Your theory is good except for one thing.  When John lives in the US and Jack lives in China  the units of food and clothing lose a lot in the translation.  This theory is based on an equal basis or standard of living.  You cannot compare the two except if they come from the same socio-economic base.

      1. profile image0
        JaxsonRaineposted 5 years agoin reply to this

        No, if the units are equal, the units are equal, no matter where somebody lives.

        We don't spend many resources on making clothing or cheap products in the US, because we can make more expensive things, trade for the cheap stuff, and be much better off.

  2. knolyourself profile image61
    knolyourselfposted 5 years ago

    So where in my job?

    1. profile image0
      JaxsonRaineposted 5 years agoin reply to this

      Where is your job? Do you feel you are entitled to be given a job?

      If you want a job, go find one or create one.

      I had to cut my OP short, but people need to understand that without outsourcing, we wouldn't be nearly as rich of a country as we are.

      People need to understand that it's OK to fire some people in order to ensure job security for the rest. In fact, it's more than OK, it's the responsible thing to do.

      Obama doesn't understand economics. He thinks ATMs are bad because they took away job. He thinks outsourcing is bad because it takes away jobs. Without outsourcing to take advantage of our comparative advantage, and without innovation which increases efficiency and productivity, we would be a society where the majority of the population is directly involved with trying to produce the necessities of life.

  3. Ralph Deeds profile image62
    Ralph Deedsposted 5 years ago

    Outsourcing can be beneficial. However, too many companies, such as Apple and WalMart have sent work to China, but left their human resources, safety, industrial hygiene and environmental policies back home in the U.S. with the result that workers at their suppliers are exposed to safety and health hazards, unfair treatment, abysmal wages while working in plants that are polluting the earth's atmosphere. Steve Jobs was a genius in many ways, but he showed absolutely no interest in working conditions in his giant Chinese supplier. Apple, since Jobs' death, is belatedly taking steps to encourage better conditions in its Chinese supplier. In my own experience WalMart's quality control process is lacking which allows too many substandard products to be sold in their stores.

    1. profile image0
      JaxsonRaineposted 5 years agoin reply to this

      I'm not saying all outsourcing is bad, but we need to stop using it as a political buzzword for 'evil'.

      If Company A has 1,000 employees, and is going bankrupt, it's responsible to outsource 200 of those jobs in order to save the other 800.

      1. Ralph Deeds profile image62
        Ralph Deedsposted 5 years agoin reply to this

        I agree.